It comes as a surprise to clients when, on occasion, they find themselves either subject to, or trying to enforce, “informal agreements”. Informal agreements may come in the form of an exchange of discussions in respect to an arrangement, or a signed Lease Offer. It may be that the informal agreement is a sword for a client (for example, the client wants to push the arrangement in the absence of a written contract signed by the parties), or a shield for a client (for example, the client wants to avoid the arrangement because there was no written contract signed by the parties – or the terms were not finally agreed).

Whether the arrangement relates to a supply of goods, services or a commercial leasing arrangement – a legally binding arrangement may be determined by way the conduct of the parties (such as one of the parties completing a condition agreed to start the arrangement (for example, supplying a service), or an exchange of emails about an arrangement), even in the absence of a formal contract – whether or not the contract is ultimately signed.

When are negotiations binding?

Courts look at the objective intention of the parties when determining whether there is a legally binding agreement. That is, whether a reasonable person would consider the agreement to be legally binding, and not the parties’ subjective intention.

Courts have found a legally binding agreement in the following situations:-

When a vendor and purchaser of commercial property agreed to the essential terms of the agreement over email, noting that the agreement was “subject to contract” and “subject to execution”. A court found that this was essentially an “agreement to contract” and made judgement against the vendor (who attempted to withdraw from the transaction due having found a more favourable third party purchaser);

Negotiations between a tenant and landlord whereby the essential terms of the lease were agreed upon were found to constitute an agreement to lease. This was the case even though the negotiations began with “subject to formal lease documents being signed” and that not all (minor) terms were agreed. The landlord was ordered to pay damages to the tenant for failing to countersign the formal lease document; and

A tenant who, after negotiating and signing a letter of offer with a landlord, proceeded to obtain council approvals (with the landlord’s assistance) and took steps to fit-out premises without a formal lease in place was found to be bound by an agreement to lease.

When determining the intention of the parties, regard will be to the surrounding circumstances of the negotiations, the relationship of the parties, subject matter of the agreement and other relevant factors.

What can you do to ensure no binding agreement is in place until documents are signed?

Parties who do not wish to be bound by negotiations or pre-contract documents (e.g. heads of agreement) must ensure that they clearly and consistently reiterate to the other party in all correspondence that no legally binding agreement will be formed until formal and final documentation has been signed. As the above cases reveal, merely stating “subject to contract” is not enough.

Further, prospective tenants should not enter into possession and pay rent until the lease is signed as this may constitute acceptance by conduct. Conversely, a landlord should not accept rent until they are in a position to be bound. More generally, parties should not begin performing their obligations under the agreement before the documents are signed.

However, the risks of making an agreement conditional is as a sword which can be used against you – as the other party to a transaction may similarly withdraw from the arrangement if there is no legally binding agreement. This may mean that you could lose a commercially advantageous deal if it is not locked in.

In any negotiation, you should always seek legal advice before accepting the terms of an agreement (whether by email, orally or otherwise) and before signing any preliminary document.

Nautilus Law Group has a team of professionals experienced in commercial and property agreements. It may be that our team can give you a “thumbs up” or recommendation for variations in a short meeting, or for more complex matters – the engagement may be extended.

Engaging a lawyer to advise on an agreement is an investment in certainty, as the costs of remedying a failed arrangement greatly outweigh the costs savings of avoiding advice.

We welcome you to contact our Property and Commercial Team to discuss your arrangements. Please free to contact Marguerite, our department manager, on (07) 5574 3560 or by email to marguerite@nautiluslaw.com.au.